Overseas markets seem to grow by the minute, luring ever smaller and younger U.S. companies with the promise of booming economies and lower costs. But for these relatively inexperienced firms, the dream of international expansion soon collides with reality: many companies find themselves unprepared to deal with the challenges of running foreign operations.
At the same time, the Sarbanes-Oxley Act has fueled regulators’ enthusiasm for rooting out wrongdoing both at home and abroad, leaving CFOs personally liable for operations that may be thousands of miles away. “I’ve been doing business internationally since the start of my career, but what’s changed recently, what really magnifies the risk, is Sarbanes-Oxley,” says Jeff Babka, finance chief at NeuStar, a telecom services firm that has built its international operations mostly through acquisition.
“Between the rapid pace of globalization and the new focus on corruption and fraud, CFOs are facing a perfect storm today that they did not face 10 years ago,” says Frank Piantidosi, CEO of Deloitte Financial Advisory Services. Adds Don Devost, CFO of iWatt, a small semiconductor manufacturer with subsidiaries in Hong Kong and Japan: “The biggest difficulty is understanding the regulatory environment wherever you’re doing business, and the risk that noncompliance poses, not just locally but also here in the U.S.”
The risk isn’t confined to small companies like iWatt. At large U.S. multinationals it can be easy for a busy CFO to overlook a distant foreign operation until a problem pops up. And problems will almost certainly pop up: more than 43 percent of companies in PricewaterhouseCoopers’s 2007 Global Economic Crime Survey reported suffering one or more economic crimes, such as fraud, in the past two years. Just ask Dow Chemical, which paid a $325,000 civil penalty last year for improper payments made to a foreign official by a fifth-tier subsidiary in India.
The moral: Ordinary due diligence isn’t enough when it comes to foreign operations. Before setting up shop abroad, whether through acquisition or from scratch, CFOs need to take a particularly hard look at the backgrounds of the managers who will be running the shop, at the people those managers do business with, and at the laws and regulations that govern how they do business.
Grease Is the Word
A good place to start is with the Foreign Corrupt Practices Act (FCPA), which prohibits the bribing of foreign officials. Although the act was passed 30 years ago, the Department of Justice is becoming more serious about enforcing it. The DoJ is taking on more cases than ever, opening 73 new investigations in the past 5 years, and the fines are getting bigger, according to law firm Shearman & Sterling.
“You used to see a couple of [FCPA] enforcement actions a year. Now you sometimes see a couple a week,” says Alexandra Wrage, president of TRACE International, a nonprofit membership organization that helps companies in their antibribery efforts. “It’s not just more cases,” she adds. “It’s also bigger fines and more personal actions. They’re sending executives to prison.”